ONGC, Oil India Surge as State Said to Be Planning Subsidy Cuts

Oil & Natural Gas Corp. and Oil India Ltd. are set for their biggest gain in 10 days following plans to reduce subsidy payouts of the nation’s largest state-run explorers.

The two companies were the biggest gainers in the 10-member S&P BSE India Oil & Gas Index, which rose 0.6 percent. ONGC increased as much as 2.5 percent and traded 2.1 percent higher at 426.75 rupees as of 11:54 a.m. in Mumbai, heading for its steepest gain since Aug. 18. Oil India rose as much as 2.8 percent and changed hands at 603.95 rupees, up 2.4 percent.

The government is planning to ask ONGC and Oil India to bear 50 percent of the revenue losses of all state-controlled refiners, with the state taking on the other half, according to a draft proposal seen by Bloomberg News and confirmed by an oil ministry official with direct knowledge of the matter. The two companies and GAIL India Ltd., the nation’s biggest gas distributor, bore 55 percent of the losses in the quarter ended June 30.

State-run oil producers give discounts on their crude to partly compensate refiners including Indian Oil Corp., which are ordered by the government to sell fuels below the cost of production to help curb inflation in the world’s second-most populous nation. The federal government gives cash compensation and the refiners themselves bear a part of the burden.

The lower subsidy may help ONGC get a higher rate for its crude and allow the government to set a higher price when it sells a 5 percent stake in the explorer later this year.

Higher Price

The ministry’s proposal may raise the final price ONGC gets for its crude oil to $65 a barrel from $52 a barrel, Kenin Jain, equity sales head at Emkay Global Financial Services Ltd. in Mumbai, wrote in a note to clients today. This would “ensure a predictable return for the oil producers and help them plan their investment for exploration,” he said.

India also plans to continue raising diesel price every month until losses end, after which the oil ministry will seek approval from the Cabinet to free pricing of the fuel from state control, the person said this week, asking not to be identified because of ministry rules. Indian Oil and other state-run refiners are incurring a loss of 1.78 rupees on every liter of diesel sold, according to oil ministry data.

“The proposal will be helpful to us, but it has to be approved by the finance ministry,” ONGC Director Finance Aloke Kumar Banerjee said by phone today. “ONGC’s burden has risen significantly in the last couple of years.”

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